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11 MAR 2015

JL v SL (No 3) [2015] EWHC 555 (Fam)

JL v SL (No 3) [2015] EWHC 555 (Fam)
(Family Division, Mostyn J, 8 March 2015)

[The judicially approved judgment and accompanying headnote has now published in Family Law Reports [2015] 2 FLR 1220]

Financial remedies – Judgment – Request for amplification of reasoning

The full Judgment is available below

The applicant’s claim for post-judgment relief was refused and the judge provided further amplification of his reasoning.

Following the final version of the judgment in JL v SL (No. 2) [2015] EWHC 360 (Fam) being published, once counsel had received a draft version, counsel for the applicant contacted the judge making a lengthy request for amplification of the calculations and reasons.

Mostyn J issued a judgment dealing with the request despite the unacceptable delay in order to dispel serious misconceptions.

Several matters were elaborated upon including the use of the Duxbury formula. The application for post-judgment relief was dismissed.

Neutral Citation Number: [2015] EWHC 555 (Fam)

Case No: FD12D00611


Civil Hearing Centre
Coverdale House, Leeds, LS1 2BH

Date: 09/03/2015

Before :


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Between :


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Alexis Campbell (instructed by Family Law in Partnership) for the Applicant
Richard Bates (instructed by Kidd Rapinet) for the Respondent

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Draft Supplemental Judgment

This judgment was delivered in private. The judge has given leave for this version of the judgment to be published on condition that (irrespective of what is contained in the judgment) in any published version of the judgment the anonymity of the children and members of their family must be strictly preserved. All persons, including representatives of the media, must ensure that this condition is strictly complied with. Failure to do so will be a contempt of court. It should be cited as JL v SL (No.3)

Mr Justice Mostyn :

[1]  On 16 February 2015 I sent out my principal judgment in draft, seeking any typographical or other corrections of a serious nature by the following day. Both counsel made nil returns, although Miss Campbell mentioned that she was out of the country. Accordingly my judgment was finalised, handed down on 18 February 2015, and placed that day on Bailii: JL v SL (No. 2) [2015] EWHC 360 (Fam) .

[2]  On 25 February 2015, a week after the hand-down, I received from Miss Campbell a lengthy request for amplification of my calculations and reasons. This is totally unacceptable. In that period I had left to sit on circuit and had dealt with much other work. Inevitably the details of this case had faded from my mind. The system depends on requests for clarification of the draft to be submitted promptly and in any event before the judgment is finalised and handed down. If Miss Campbell had anticipated that following her return from holiday she would seek amplification then she should have said so and asked for the hand-down to be deferred. That would have been considered by me on its merits.

[3]  I have been tempted to reject Miss Campbell's request summarily as being too late. But I will not do that and will address her arguments, if only to dispel what seem to be serious misconceptions on her part.

[4]  I append as the annex to this supplemental judgment the request made by Miss Campbell. It can be seen that 13 separate questions are posed. I am not going to answer them by rote exam-style, as many of them are founded on the misconceptions which I will dispel.

[5]  I turn to Miss Campbell's first 6 points which are grouped under the heading "Application by W for amplification of calculations".

[6]  In my principal judgment I used the Duxbury algorithm to calculate the wife's needs for the three phases I identified. I started with phase 3 (see para 58). The figure calculated was £1,191,357. I found that part of this fund would be met by the wife's pension share of £650,000. That was a perfectly reasonable assumption to make given the greatly increased flexibility afforded to the holders of pension funds by the Taxation of Pensions Act 2014, which received royal assent on 17 December 2014. It probably would have been a reasonable assumption even had the reform not been enacted. I heard no argument to the contrary at the hearing. It would have been unreal to take some annuity figure calculated by a pension expert for the trial before District Judge Reid in October 2013 well before the pension reforms were announced in July 2014. This deals with Miss Campbell's point No. 4.

[7]  I explained in para 58 that in order to build the phase 3 Duxbury fund the wife would need to preserve carefully £541,357 but that she would have available investment income from that sum to meet immediate needs in phases 1 and 2. I took the Duxbury norm of 3% gross. Miss Campbell asks at her point No. 2 "does the Duxbury calculation of £1,191,357 assume gross investment income on the preserved element of £541,357 remains invested in the fund?" The answer is a categorical no. The calculation in fact assumes that the sum will more than maintain its value in real terms enjoying the Duxbury norm for capital growth of 3.75% while experiencing inflation of 3%. So in real terms, on these norms, it will grow by 0.75% annually while the whole of its income yield will be available for meeting needs in phases 1 and 2. This would have been obvious from reading the explanatory text to Table 14 in the 2014-2015 edition of At A Glance.

[8]  Prompted by Miss Campbell’s propositions I have considered an alternative approach to the computation of the wife’s needs starting from the position that she has immediate funds of £1,302,491 available to her, which will be augmented by earnings (in years 4-10) of around £14,800 (which at current rates of tax would be £13,007 p.a. net), together with a pension share of £650,000 (in 2015).

i) On the assumption that the pension fund continues to grow, untaxed, but at a rate of only 3.75% p.a. by the date of the wife’s need to draw upon it, it would be worth around £974,500 of which 25% (or £243,625) being the tax free lump sum will be a direct accretion to her invested funds. I have adopted a return rate of only 3.75% in relation to the pension growth so as not to need to compensate in the arithmetic for inflation.
ii) The balance of around £731,000 could be drawn down by the wife under the new regulations, at a gross rate of at least £29,235 p.a. for the remainder of her life expectancy.
iii) On that basis by the time the wife is 60 (and before she has touched her pension), and if the wife spends at the rate referred to in paragraph 57 of the main judgment, the wife’s capital will remain undiminished (i.e. as I said in paragraph 60 of the main judgment, she should not, in that phase, be required to amortise her capital).
iv) Even after she takes her pension, and ceases to have any earned income at the age of 60 or 61, on those assumptions, her capital will continue to grow. By the assumed date of her death in around 39 years according to the mortality tables, her capital wealth will have grown in absolute terms to over £2.3m although with the effect of inflation that would have a real value of only about £860,000.
v) Since this is considerably more than the present value of her share of the non-matrimonial assets (i.e. £465,000) it is clear that, as my original methodology demonstrated, she is easily able to adjust to independence with her share of the matrimonial and non-matrimonial property, without undue hardship and without even eroding all of her share of the matrimonial property, let alone eating into her non-matrimonial property. She will, of course, also still have her unencumbered home with a present value of over £900,000. She would thus have, in today's money, on this alternative basis, around £1.5m to pass on at her death, subject to inheritance tax.

[9]  These explanations by me dispose of all of Miss Campbell's points 1 – 6.

[10]  I turn to her next section headed "Application by W for amplification of allegedly inadequate reasons for the decision" and the seven points grouped in it.

[11]  In her point 8 Miss Campbell asserts that "the Duxbury formula is a tool but not an accurate reflection of real rates of return" which I found to be a statement both bold and, perhaps more importantly, un-evidenced by anything stated at the hearing (or, for that matter, in her application for what is in effect post-judgment relief).

[12]  The assumptions underpinning the Duxbury algorithm are explained in the explanatory text to Table 14 in the 2014-2015 edition of At A Glance, as follows:

"The underlying 'assumptions' are (1) a uniform income yield; (2) a uniform rate of capital growth; (3) a uniform rate of inflation; (4) a consistent regime of taxation - with bands/allowances increasing in line with inflation; (5) a constant level of drawdown in real terms; (6) a consistent rate of 'churn' (the realisation of capital gains other than to fund expenditure); and that the recipient will (7) survive for precisely the expected average of her (or occasionally his) contemporaries; and (8) be or become entitled to a 'full' state pension; which will (9) increase in line with prices; while (10) the age at which a state pension is payable will not alter in the meantime. All of the assumptions are necessary simplifications which will not materialise: as Ward LJ said in B v B [1990] 1 FLR 20 'the only certainty is that it will not happen as we have predicted'. […] The assumptions include three key financial predictions - an average income yield of 3% p.a., an average capital growth of 3.75% p.a. and average inflation of 3% p.a."

This text was cited verbatim by Ryder LJ in the recent decision of H v H [2014] EWCA Civ 1523 (2 December 2014) at para 30.

[13]  It is important to remember that a Duxbury fund is usually calculated over a long period. In this case from the start of phase 1 to the end of phase 3 over 30 years are covered. Generally speaking in most human fields the best prophet of the future is the past. The key assumption is that over a longish period it can be reasonably predicted that a fund will perform in actual gross terms by 6.75% annually (i.e. 3% income yield plus 3.75% capital growth) but the owner of the fund will suffer inflation of 3% thus giving a real rate of return of 3.75%. The key datum is however the predicted actual gross performance of 6.75%. Is that a reasonable guess?

[14]  Between January 1985 and January 2015 the FTSE 100 index rose from 1277 to 6810. This corresponds to capital growth in that 30 year period of 5.74% annually. Over the same period the broader based FTSE-250 has grown by almost 8.8%, while a portfolio based on the US Dow Jones Industrial index (after allowing for the variance in the exchange rate) over the same period would have grown by over 6.9%. Thus it can be seen that the rate of capital return assumed in the Duxbury algorithm of just 3.75% is somewhat cautious, recognising that the recipient of an award is unlikely to be advised to invest the whole of her fund in equities, and that other kinds of investment are likely to achieve lower capital returns. Dividends (i.e. income yield) would also have been paid, perhaps at 3% a year. An alternative perspective is to look at P/E ratios over a long period. From 1990 to 2014 they have averaged for the UK 12.6, which translates to annual growth of 7.9%. So on the basis of history 6.75% per annum is a very reasonable guess.

[15]  Over the same period the RPI index has moved from 91.2 to 255.4. This corresponds to inflation of 3.49% annually. Again, 3% is a reasonable guess, even if there is actually no inflation right now.

[16]  Therefore, I unhesitatingly reject Miss Campbell's bold and unsupported assertion.

[17]  In H v H at para 31 Ryder LJ stated:

"In summary, it is not wise to assume that because the Duxbury Committee are of the opinion that in the context of their calculations 3.75% gross is achievable over the long term with a cautious investment strategy that the parties will agree that that rate is applicable to capital funds that are not to be amortised on the facts of a particular case. However, if they do agree or if the judge decides that assumption is valid on the facts of a case, I cannot for my part see how objection can be taken. If they do not, then the rate chosen by the court should be reasoned."

Before me at the hearing Miss Campbell merely asserted a gross rate of return of 3%. No evidence was adduced as to why the views of the Duxbury Committee should not be followed, and for that reason I preferred, inevitably, to use the customary formula, with its stated economic assumption of an actual gross performance rate of 6.75%. In H v H at para 26 Ryder LJ stated that "I am very firmly of the view that there is no 'industry standard' even less an acknowledgement by the Family Division judges that there is or should be such a rate". Of course there is no "standard" rate in the sense that the economic assumptions underpinning the formula are written in marble from which there can be no deviation. But the Duxbury tables are used in countless cases. Their underlying methodology and assumptions are widely accepted as the usual starting point, and where there is no countervailing evidence, the usual finishing point. In that sense they do represent an "industry standard".

[18]  In H v H the trial judge devised his own capitalisation methodology and used an actual rate of return of 3.75% net of tax for the purposes of his computations. I think he offered a hostage to fortune in departing from the Duxbury algorithm, especially where an option in the program is to do the calculation on a non-amortising basis (as I myself did for phases 1 and 2 – see para 59). In his para 25 Ryder LJ stated "it should be noted that 3.75% net would be 5.4% gross, a rate of return that would require some justification". With respect, it requires no particular justification. As I have explained, the central datum underpinning the Duxbury algorithm is a gross actual rate of return of 6.75%. And I have further explained that, irrespective of income yield, in terms of capital growth alone the FTSE 100 has grown annually over the last 30 years by 5.74% and better than that by reference to the FTSE-250 and the Dow Jones Industrial Index.

[19]  This deals with Miss Campbell's point No 8.

[20]  Her points Nos. 9 – 13 appear to suggest that the overall result is unfair when compared to the award which she successfully appealed. The first basic fallacy is the assumption that merely because the wife was successful in overturning the original award because of an error of approach by the District Judge, that the re-exercising of the judicial discretion on the correct approach would necessarily result in a markedly 'better' outcome for her. The second basic fallacy is that it treats the spousal maintenance awarded by the District Judge as if it were a guaranteed annuity. That it emphatically is not. It is variable. It would end on the death of either party or the remarriage of the wife. The husband in fact had lost his job and may well have succeeded in a downward variation. One can foresee many other circumstances where a variation might be ordered, most obviously on his retirement. In making her comparison Miss Campbell is simply not comparing like with like. On any view as a result of the appeal the wife is in a more secure, stable and independent position than she was before. She has not gained a pyrrhic victory. Above all, the appeal brought about a clean break, an objective which is not only socially desirable but which accords with the intention of Parliament (see section 25A of the Matrimonial Causes Act 1973). As the President, Sir Mark Potter, stated in VB v JP [2008] EWHC 112 (Fam) [2008] 1 FLR 742, [2008] 2 FCR 682 at para 59 "a clean break is to be encouraged wherever possible". In her point 11 Miss Campbell says "W will now have to use her own resources to capitalise H’s obligation to pay periodical payments during phase 1 & 2. W will fund her own clean break." I confess to failing to understand this point entirely. Of course every claimant must use her own resources to meet her needs, and can only claim periodical payments if they are insufficient. The submission comes close to suggesting that this wife has an independent sharing or compensation claim to the husband's income irrespective of her own resources. As I have sought to explain this could only happen in a most exceptional case, which this case clearly is not (see B v S [2012] EWHC 265 (Fam) at paras 75 – 79, and SS v NS (Spousal Maintenance) [2014] EWHC 4183 (Fam) at para 46(ii)).

[21]  Miss Campbell's application for post-judgment relief is therefore rejected.



Application by W for amplification of calculations

1. Phase 3 assumes that £541,357 is preserved between now and W’s 60th birthday to meet retirement income on an amortised basis. Phases 1 and 2 assume that W earns £16,241 pa gross interest on the preserved capital fund of £541,357.

2. Does the Duxbury calculation of £1,191,357 assume gross investment income on the preserved element of £541,357 remains invested in the fund?

3. If so, there is not any investment income available (ie £16,471 gross pa) to reduce W’s income needs in phases 1 and 2. Should the Duxbury calculation for phases 1 and 2 be recalculated to reflect this?

4. In phase 3 the income needs of £68,981 have been used to produce a Duxbury calculation of £1,191,357. From this the court has deducted the pension value to identify the residual “preserved fund”. Assuming £650,000 of pension funds will meet approximately half of retirement income is not accurate. Would it not be more accurate to enter into the Duxbury calculation W’s actual pension income at 60? The SJE at trial calculated the pension share to produce a gross income of £25,460 pa gross. If this is done, the sum needed to fund phase 3 is larger and the current Duxbury provision is inadequate. Can this be recalculated?

5. Recalculations in respect of 3 and 4 above produces the following:

Capital to invest (C)1,302,491
Duxbury for phase 31,191,357
Less gross pension income (per SJE) of25,460
Preserved fund for phase 3 (D)670,392
Capital for phases 1 and 2 (C-D)632,099
Duxbury for phases 1 and 21,135,681
Sum available632,099
Amortisation needed503,582
Percentage of amortisation80%

 6. The court intended W’s investment fund for phases 1 and 2 should be “largely” un-amortised; the net effect of the recalculations means that W must utilise significant capital sums to meet her income needs in the next 10 years. Was this the court’s intention?

Application by W for amplification of allegedly inadequate reasons for the decision

7. The court has rejected W’s capitalisation methodology and preferred the Duxbury calculator.

8. The Duxbury formula is a tool but not an accurate reflection of real rates of return. Under the order, W will have non-pension assets worth £2,357,491. After housing costs of £955,000 W has £1,402,491 to invest for her income for the next 10 years. Assuming a real rate of return of 3% will produce gross income of £42,074 pa. This is nowhere near W’s net income needs for phases 1 and 2. Can the court explain why the Duxbury tool is preferable to W’s capitalisation methodology in these circumstances?

9. District Judge Reid found that W should have:

(a) Capital of £1,973,091
(b) £650,000 of pension funds and
(c) £44,504 pa from H for 3 years (£133,512) and
(d) £38,156 pa from H for 7 years (£267,092) as an extendable term

10. This court has found that that W should have:

(a) Capital of £2,357,491 (including £100,000 of costs)
(b) Pension funds of £650,000
(c) An immediate clean break

11. W has £384,400 more capital as a result of the successful appeal but has lost her periodical payments entitlement from H which this court has valued at £884,030 and DJ Reid valued at £400,604. W will now have to use her own resources to capitalise H’s obligation to pay periodical payments during phase 1 & 2. W will fund her own clean break.

12. H conceded a repayment to W of 50% of the inherited assets at £232,500. As a result of the court’s findings, W will receive from H the total sum of £256,828 (including £100,000 for costs) to achieve a clean break. H will in real terms pay £24,328 to capitalise his periodical payments obligation. His Lordship commented at the rehearing that W would not suffer a pyrrhic victory. Can the court clarify if this result was intended?

13. As a result of H’s dishonesty at trial, the final decision has been delayed by a year. W’s house has increased in value and H has now shared in that increase. H has therefore received a benefit from the delay caused by his dishonesty. Can the court clarify whether this was intended?

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